The Market Lifts Xinyu Iron & Steel Co., Ltd (SHSE:600782) Shares 32% But It Can Do More

Xinyu Iron & Steel Co., Ltd (SHSE:600782) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

Even after such a large jump in price, considering around half the companies operating in China's Metals and Mining industry have price-to-sales ratios (or "P/S") above 1.3x, you may still consider Xinyu Iron & Steel as an solid investment opportunity with its 0.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Xinyu Iron & Steel

What Does Xinyu Iron & Steel's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Xinyu Iron & Steel's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Want the full picture on analyst estimates for the company? Then our free report on Xinyu Iron & Steel will help you uncover what's on the horizon.

How Is Xinyu Iron & Steel's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Xinyu Iron & Steel's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 48%. As a result, revenue from three years ago have also fallen 50% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 48% as estimated by the dual analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 13%, which is noticeably less attractive.

With this information, we find it odd that Xinyu Iron & Steel is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Xinyu Iron & Steel's P/S

Despite Xinyu Iron & Steel's share price climbing recently, its P/S still lags most other companies. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Xinyu Iron & Steel's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. There could be some major risk factors that are placing downward pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

Before you settle on your opinion, we've discovered 2 warning signs for Xinyu Iron & Steel (1 can't be ignored!) that you should be aware of.

If these risks are making you reconsider your opinion on Xinyu Iron & Steel, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.